2018 (12) TMI 473 - NAPA - GST

Profiteering - benefit of tax reduction not passed on to the recipients - Nestle Munch Nuts 32 Gm. Chocolate - Cadbury Dairy Milk Chocolate - contravention of Section 171 of CGST Act, 2017 - Held that - It is clear that the Respondent had increased the base price by ₹ 1.56 per unit in respect of the Nestle Munch Nuts 32 Gm. Chocolate and ₹ 3.13 for the Cadbury Dairy Milk Chocolate and hence the MRP charged on both the products had remained ₹ 20/- and ₹ 40/- per unit respectively before and after the reduction in the rate of tax. Therefore, it is established that the Respondent had in fact increased the base prices of these Chocolates and sold them at the same MRPs which he was charging before the reduction in the rate of tax instead of reducing the same and had hence not passed on the benefit of such reduction to the Applicant. The Respondent has vehemently argued that he had no control on the fixing of the base prices as well as the MRPs as he was charged increased base prices by his Distributors Viz. M/S CTC and M/S NE and hence the Respondent could not make any changes in the base prices and the MRPs - Held that - It is apparent from the record that the Respondent is duly registered under the CGST/SGST Act, 2017 and therefore, he was under legal obligation to follow the Notification dated 14.11.2017 mentioned above vide which the rate of GST was reduced from 28% to 18% on both the above products. He cannot deny his accountability as well as the duty cast upon him under the above Notification by contending that he had not increased the base prices whereas he had charged the increased base prices on both the above products after 15.11.2017. The claim of the Respondent that his profit margins had remained the same is also not tenable as he had not only increased the base prices but had also earned additional margin on the enhanced prices. He had further forced his customers to pay additional GST on the increased base prices otherwise the customers should have got further benefit of reduced base prices. The Respondent has also argued that M/S CTC and M/S NE had not given him discounts for passing on the benefit of tax reduction. However, perusal of the tax invoices issued by both the above Distributors shows that they had given him discounts to pass on the benefit of tax reduction with specific endorsements that he was required to pass on the benefit of reduced rate of GST. It stands concluded that the Respondent has indulged in profiteering in violation of the provisions of Section 171 of the CGST Act, 2017 and has not passed on the benefit of reduction of tax as per the Notification dated 14.11.2017 - Accordingly, the Respondent is directed to reduce the sale prices of the above products immediately commensurate to the reduction in the rate of tax as was notified on 14.11.2017 and pass on the benefit of reduction in the rate of the tax to his customers. Penalty - Held that - Although notice for imposition of penalty has already been issued to the Respondent on 16.08.2018 however, no formal oral or written pleadings have been filed by the Respondent on the same - as per the provisions of the principles of natural justice it would be appropriate to issue fresh show cause notice asking him to explain why penalty should not be imposed on him for the above offence. Application disposed off.

Summary

Issues Involved:
1. Allegation of profiteering by not reducing prices post-GST rate reduction on chocolates.
2. Examination of the Respondent's defense regarding base price increases by distributors.
3. Analysis of the DGAP's investigation and findings.
4. Determination of the profiteering amount.
5. Legal obligations and actions under Section 171 of the CGST Act, 2017.
6. Imposition of penalties and corrective measures.

Issue-wise Detailed Analysis:

1. Allegation of Profiteering:
The Applicant No. 1 alleged that despite the GST rate reduction on chocolates from 28% to 18% effective 15.11.2017, the Respondent did not reduce the prices of Nestle Munch Nuts 32 Gm. Chocolate and Cadbury Dairy Milk Chocolate. The Respondent was accused of profiteering in contravention of Section 171 of the CGST Act, 2017.

2. Respondent's Defense:
The Respondent argued that the base prices were increased by their distributors, maintaining the same profit margins of 11.5% and 12%. The Respondent submitted that the base prices increased from ?14.01 to ?15.20 for Nestle Munch Nuts and from ?27.90 to ?30.27 for Cadbury Dairy Milk Chocolate, justifying the unchanged MRPs of ?20 and ?40, respectively.

3. DGAP's Investigation and Findings:
The DGAP's Report highlighted that the distributors provided discounts to the Respondent with explicit instructions to pass on the GST rate reduction benefits to consumers. Despite these discounts, the Respondent increased the base prices, resulting in unchanged MRPs. The DGAP concluded that the Respondent did not pass on the benefit of the GST rate reduction to consumers, as evidenced by the invoices and the unchanged MRPs post-rate reduction.

4. Determination of Profiteering Amount:
The DGAP calculated the profiteering amount as ?15,958, based on the increased base prices and the number of units sold post-rate reduction. The Respondent was found to have profiteered ?1.56 per unit for Nestle Munch Nuts and ?3.13 per unit for Cadbury Dairy Milk Chocolate. The Respondent's claim of receiving no GST rate reduction benefit from distributors was refuted by the DGAP's findings.

5. Legal Obligations and Actions:
The Respondent, being a registered supplier under the CGST/SGST Act, 2017, was legally obligated to pass on the benefit of the GST rate reduction to consumers. The Authority determined that the Respondent violated Section 171 by not reducing the MRPs and charging increased base prices. The Respondent's argument that he maintained profit margins was dismissed as he failed to reduce MRPs and charged additional GST on increased base prices.

6. Imposition of Penalties and Corrective Measures:
The Authority directed the Respondent to reduce the sale prices of the chocolates immediately and refund the excess amount of ?4.69 to Applicant No. 1 with 18% interest from 16.11.2017. The Respondent was also ordered to deposit the balance profiteered amount of ?14,658.31 into the Consumer Welfare Fund (CWF) with 18% interest. The DGAP was instructed to conduct further investigations for sales post-31.03.2018. Additionally, the Respondent was found liable for penalties under Section 122 (1) (i) of the CGST Act, 2017, for issuing incorrect invoices and not passing on the tax reduction benefit.

Conclusion:
The judgment established that the Respondent indulged in profiteering by not passing on the GST rate reduction benefit to consumers, violating Section 171 of the CGST Act, 2017. The Respondent was directed to take corrective measures, including refunding the excess amount and depositing the profiteered amount into the CWF. Penalties were also imposed for issuing incorrect invoices and contravening the provisions of the CGST Act, 2017.